Ladies and gentlemen, welcome to BWX Technologies third quarter earnings conference call. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, we will conduct a question and answer session, and instructions will be given at that time. Please note the call is being recorded. If you require Operator assistance, please press star then zero. I would now like to turn the call over to our host, Mr. Mark Kratz, BWXT’s Director of Investor Relations. Please go ahead.

Thank you Drew. Good morning and welcome to BWXT’s third quarter 2020 earnings call. Joining me today are Rex Geveden, President and Chief Executive Officer, and David Black, Senior Vice President and Chief Financial Officer. On today’s call, we will discuss certain matters that constitute forward-looking statements and involve risks and uncertainties, including those described in the Safe Harbor provisions found in this morning’s earnings release and our SEC filings. We will also provide non-GAAP financial measures which are reconciled to GAAP measures in the quarterly material. Copies of these documents along with today’s earnings presentation are available on the Investors section of our website. With that, Rex, I will turn the call over to you.

Thank you Mark, and good morning everyone. Earlier today, we reported another solid quarter with non-GAAP earnings per share of $0.79 on 3% revenue growth. These results maintained the exceptional business performance year to date with earnings per share up 20% on 12% revenue growth. Year to date free cash flow was flat despite investing nearly 50% more capital and what is still projected to the peak investment year to enable attractive future organic growth. In addition to strong performance to date, we are seeing positive signs in Canada both for commercial nuclear power and medical isotopes business. Solid third quarter results were boosted by outperformance from the nuclear power group where revenues were driven 28% higher as nuclear power service outage volume returned as well as incremental demand for commercial nuclear fuel. Although the medical isotopes business was still down for the quarter, the rate of decline is improving and appears to be showing signs of a quicker recovery than we had anticipated. This positive momentum gives us optimism and we expect the trend to continue as we finish the year. As I outlined on the last call, we were evaluating opportunities to offset the headwinds related to COVID’s impact on outage schedules and the general medical isotope demand. To that end, in the third quarter we qualified for Canadian government reimbursements to offset year-to-date negative COVID financial pressures, which allowed us to maintain a full workforce to take advantage of opportunities as the market returns to normal in the coming quarters. This third quarter benefit was a boost to profitability that we are not expecting to recur in the fourth quarter, and we have adjusted the NPG margin guidance back to more normal annualized levels. The nuclear operations group also delivered solid results in the quarter as we…

Thanks Rex. Starting with total company results on Slide 4 of the earnings presentation, third quarter and year-to-date revenues were up 3% and 12% respectively, and as Rex mentioned, in the third quarter were driven primarily from a resurgence in the nuclear power group. Strong operational execution resulted in third quarter earnings per share about flat at a record $0.79 with year-to-date earnings of $2.29 per share, up 20% when compared with the same period in 2019. Year-to-date operating margins expanded 20 basis points to 17.7%, so earnings growth was predominantly driven by segment operations, which is depicted on Slide 5 of the presentation. Operating segments drove $0.26 of improvement and new debt structuring and prudent use of cash drove $0.03 of improvement through lower interest costs. We also realized $0.08 of EPS improvement through higher pension and other income. Our year-to-date cash generation from operations has been robust at $148 million, up 63% versus the prior year period. This strong cash generation has allowed us to continue to invest heavily in the capital expansion of our businesses while maintaining lower borrowings. Moving to the third quarter segment results on Slide 6, nuclear operations group revenue was down 2% to $387 million. Higher down blending and naval nuclear fuel production volume was more than offset by lower long lead material production that was accelerated into the first half of this year. NOG operating income was $68.5 million, down from the prior year primarily due to fewer positive adjustments to backlog contracts than were received in the third quarter last year. This resulted in a 17.7% operating margin for the segment in the third quarter of 2020. The nuclear power group generated strong revenue in the third quarter at $108 million, up 28% compared with the third quarter last year, primarily…

Thank you David. Let me finish by providing color on 2021 and some thoughts on BWXT’s growth as we move forward. As 2021 begins to take shape, our early view is that we anticipate another solid year resulting in earnings consistent with the current analyst EPS consensus. While year-over-year earnings growth is more modest, the robust performance year-to-date and expected growth next year still continue to reconcile well with our goal of managing the growth of the company over a multi-year time horizon. The nuclear operations group has fully ramped up on the first Columbia and we are having exceptional performance on that program for the Navy customer, and we anticipate another order in the next multi-year pricing agreement. We also had an exceptional year of aircraft carriers, benefiting from the acceleration of the Ford class, and believe this program will continue for decades as the U.S.’ main force projection asset. These drivers give us a stable foundation in 2021 from which to grow. In the nuclear power group, we anticipate COVID-19 impacts to gradually diminish. Accordingly, we are forecasting modest growth given some unknowns. Lastly, I mentioned the robust DOE pipeline, the many opportunities for which we hope to compete successfully will drive us towards a more sizeable operating income business line, a vision we have shared with you in the past. 2021 also serves as a pivotal year as we largely wrap up the capital investments for the Navy franchise, which will set us up for sustained longer term growth we believe exists in that business. We will also complete the build-out of the moly-99 product line and transition to commercialization. We anticipate closing out a strong year and look forward to providing more detailed guidance on 2021 in February. I want to conclude my remarks by summarizing…

[Operator instructions] The first question comes from Robert Spingarn of Credit Suisse. Please go ahead.

Hi, good morning.

Morning Rob.

Rex, you just talked about the long term, so I have a couple of high level, longer term questions that I thought I’d ask. The long term submarine build schedules include this large payload class sub that’s been discussed post Columbia, I guess it’s based on Columbia, but for conventional weapons maybe about 15 years from now. While that’s far out, a bunch of us use DCFs, long term DCFs to value the stock, and I’m just curious what, if anything, you’ve heard about that program and what its mission profile and level of budget priority might be.

Sure, good morning Rob. We certainly do hear about that program - it has the moniker, SSNX until it gets a class name, and there’s some thought discussion and analysis going on, on that program right now. It would be the follow-on to the Virginia fast attack submarine, and it would feather in sometime in the--probably in the last 2030s. We do expect it will be a larger type of submarine, probably in the size class of the Columbia, but there’s not much more detail than that at this point. We certainly are working with our Navy customer on what that would look like and how we can take it into production.

If it were based on Columbia, would your work package be very similar despite the fact that it would be different types of weapons - cruise missiles, hypersonics? Would that affect you at all?

It would affect us only in the sense of the--let me call it the scale of the nuclear propulsion system. Columbia class scale nuclear propulsion system is obviously larger volume for fuel and for components in our production facilities, so I think that’s good for the business.

Okay, and then the other one is also kind of high level, but I wanted to get your thoughts regarding any new opportunities that might open up with a potential Biden administration, if they win, just given the environmentally positive impacts of safe nuclear power. Should we be looking for you to benefit from any green focused infrastructure building, and if so, would you raise the R&D level from where we are today?

Rob, we haven’t targeted commercial nuclear power because of the business case that’s typically associated to those applications. Instead, what we’ve tried to focus on are new businesses in the space and defense micro reactor area that are related primarily to national security and space needs. The view there is that there’s a class of problems in those markets for which a compact nuclear reactor is, as I always say, either the preferred solution or the only solution, things like getting a crew to Mars and back quickly, things like fission surface power on the moon, things like being able to move assets in space very rapidly, high value assets and defend them, things like directed energy weapon power for terrestrial applications. In those cases, you’ve got more priority on mission success than you do on price, so it’s less of a business case issue for the customer in that case. That’s where we’ve chosen to make our investments and put our R&D, so that’s how we see it. I’m hopeful about a resurgence in commercial nuclear power, but we aren’t betting on that outcome.

Okay, thanks Rex. Appreciate that.

Thank you.

The next question comes from Pete Skibitski of Alembic Global. Please go ahead.

Hey, good morning Rex and David and Mark. Rex, just maybe adding some color on this new shipbuilding plan that Secretary Esper has been talking about, I think maybe you were hinting that we might see some additional funding in the fiscal ’22 five-year plan, but maybe more so weighted towards the out years, so maybe you could speak to that. Then can you guys give us maybe a ballpark on the amount of incremental capex that you might need if maybe we go to three Virginias a year or four Virginias a year? Just wondering if you could give us some color on that.

Yes, sure Pete. We obviously haven’t seen that shipbuilding plan yet, but we heard Esper’s comments and we’ve seen other comments on it. In the previous shipbuilding plan, there were 48 fast attack submarines and then in the prior one, actually the current one, the current shipbuilding plan went to 66. Esper said that he was looking at something like 70 to 80 fast attack submarines in the fleet, so there’s incremental improvement on that and that’s obviously good for us. He also of course talked about going to a three Virginia procurement tempo. When we last discussed any capital needs around that, what we said was if there was a single year of a third Virginia, we could probably accommodate that without any additional build-out. We haven’t evaluated a permanent three Virginia tempo and we certainly haven’t discussed any capital needs around that, but we would have to invest in that case. The other thing that he talked about, of course, was priority of the Columbia product line, which is good, and then talked about maybe possibly configuring the carrier fleet differently with some smaller class carriers and perhaps fewer large class aircraft carriers. It just remains to be seen how all that would impact the business, but in general I think that shipbuilding plan, should it come to pass, is favorable to our business.

That’s great. Just one follow-up from me, just on the issue of Congress adding some money for a second Virginia, or at least a reactor, a second reactor in the fiscal ’21 budget. We’re under the CR right now. I’m just wondering if we get an actual approps bill signed off by the end of the calendar year, how do we think about how that impacts you guys from a timing perspective?

We certainly have plenty of backlog, Pete, so I think the timing of that appropriation doesn’t create too much financial sensitivity in our business.

Okay, thanks. Thanks so much, guys.

Thank you.

The next question comes from Bob Labick of CJS Securities. Please go ahead.

Good morning. I wanted to ask a question about NSG. Rex, I think at the end, you mentioned potentially four projects to be awarded next year, so lots of moving parts. Was hoping you could give us an update on what happened, what’s going on at Hanford, and then the other projects, out of all of them, how many--are you incumbent or are they all new potential wins? Just a summary around the NSG moving parts.

Yes, sure Bob. Thank you for the question. What happened with the Hanford tanks is that the DOE is conducting an internal corrective action right now, and they expect to re-award it sometime hopefully in the near future. We feel good about our prospects there. We wrote a winning proposal, obviously, and we’re standing by for that outcome, and that’s up to the DOE so I won’t make further comment on that. The other ones, Pantex and Y-12, it’s a large opportunity. We are not presently incumbent on that, although we were the prime contractor on that site for a long number of years, from ’95 to 2014, I believe. The Savannah River liquid waste, we are also not incumbent on that but it’s a very significant opportunity and fits right into our capabilities around nuclear and environmental remediation and nuclear operations in particular. Idaho clean-up contract would also be a new one for us, although we have been in that complex in the past doing environmental remediation work on the mixed waste treatment contract in the past. Then the other one is--what’s the fourth one there? Oak Ridge - yes. Oak Ridge clean-up contract, there is an incumbent there, it’s not us, and so that one would also be a new opportunity.

Okay, great. Then jumping to NPG, the non-moly isotopes, you talked a little bit about the trends of elective procedures returning. Can you just give us a sense of what the impact has been and how--you know, what you’re thinking now, how long it could take to get back to levels pre-COVID that you had expected before?

Sure, so Q2 was the low point for us, and we experienced revenue losses that are consistent with the things you might have heard from other medical isotope companies, so somewhere in the range of 25% to 50%, so it was a very challenging quarter for us. Q3 for us has been year-over-year negative, but pretty close to flat year-over-year, so that’s why we feel encouraged. It feels like we went through an inflection point, Bob, and are on our way back to growth again. The other thing to keep in mind there is those elective procedures that were delayed are not permanently lost business. We fully expect those procedures to be done at some point, and so I think there’s a bit of latent demand in the market around that. We’re seeing hopeful signs right now and I’m pretty encouraged about it.

Okay, super. Last one and then I’ll jump back in queue, you obviously gave capex guidance again this year and mentioned this is the peak spending. Can you talk just a little bit about capital expenditures going forward, the M&A environment? Are you even able to go out and start doing due diligence, or how are you thinking about that over the next few years?

As far as capital, what we’ve said is this year will be our peak year, next year will be slightly lower in ’21, and then in ’22 toward the end of the year, we will be getting to maintenance capital - that’s without these other things, the third Virginia thing being talked about, that’s what our plan is. As far as M&A, we are still acquisitive. Our M&A team, led by Rob, there are active things they’re looking at, as they are always. We feel that if we find something, we will be able to do the due diligence and perform what we need to perform on any interesting projects we find, so we don’t see any problems there.

Okay, super. Thanks so much.

The next question comes from Carter Copeland of Melius Research. Please go ahead.

Hey, good morning gentlemen.

Morning.

Rex, that latent demand you talked about in the medical isotopes, is that something that comes back in ’21, in your view, or is it too hard to call in terms of how long you expect to recover that?

Well, we hope it comes back in ’21 based on the trends that we’re seeing. We’re being a bit cautious about how we project that business in ’21, obviously because of the unknowns around COVID, but we’ve seen a pretty nice bounce back already.

Okay. David, on the NOG performance, I wonder if you might just give us a little bit more color on the segment level EACs and the impact there year-over-year, and maybe just a better sense of how much the down blending mix benefit was, maybe even in rough terms. Thanks.

NOG this quarter, obviously year-over-year it’s smaller, but we’ve always said of NOG that your margins, your revenues are going to be different quarter over quarter, even year over year when you do a comparison on a quarter. We still feel very strongly with NOG, as we talked about here. We feel the revenue in NOG is going to go up slightly now versus--you know, versus up about 10, it’s going to be greater than 10; but once again, the margins themselves will continue to be in the high teens with room for improvement on the CAS pension reimbursement. This low quarter of margins is something that doesn’t concern us, because we feel when we get to the year, we’ll still meet our guidance. As far as the details on the down blending versus others, it’s all part of our estimates of completion and positives on the contracts, and we don’t get into individual dollar values there.

All right, no problem. Then just one last one, Rex, with respect to the moly-99 remaining milestones, can you just give us a sense with respect to what milestones lay ahead versus what you’ve gone through in the rear view mirror, how that informs your confidence level around the targets and around the effort holistically? Thanks.

Sure Carter. We’ve talked in the past about four major work streams on that moly project - there’s the radiochem line, the radiopharm line, the target delivery system, and then a pretty major construction project around all of that. What we’re seeing is the radiochem line, we ordered--we procured a unique hot sale for that one and are integrating that line, modifying some existing hot sales. The radiopharm line, we commented on in the script, but that one’s being built in Italy by a contractor, and we just completed the functional acceptance testing on those hot sales all integrated, so six of them end-to-end running together. They’ll be shipped to us pretty shortly, so I feel very good about radiochemistry. We’ll be running cold runs in the radiochemistry line early next year. The radiopharmacy line, we feel quite good about now with the completion of that functional test, and the imminent receipt of those hot sales to integrate into our facility in Kanata, so that’s two of them. On the target delivery system, that one’s quite mature - we’re just working with the regulator on getting the design approved and getting the go-ahead to install it on a reactor, so the progress there is very good. Then the construction is coming along remarkably well. We’ve made pretty significant changes to that facility out there and it seems to be coming together. Those are the major work streams. Now what’s ahead of us is we’ve got to integrate all that stuff. We have to do so-called cold runs with unirradiated material, and then we go through a period called validation next year, where we’re exercising all of that equipment together to produce a viable product and then we submit a reference batch to the FDA and await their approval. We will submit that reference batch sometime next year and then watch the clock for approval from the FDA, and then hopefully get into production as soon as possible after that in 2022.

That’s great, thank you for the color.

Thank you.

The next question comes from Michael Ciarmoli of SunTrust. Please go ahead.

Hey, thanks for taking the question here. David, just back to the energy margins, that was the lowest margin you’ve put up as a standalone company. Anything else you can give us there? I know you maintain the low teens with the FAS-CAS benefit, but even any color going into the fourth quarter? You can get to the low end of the EPS range at a 17% margin, 18%, so can you maybe give us a better sense of what’s happening there and why we should continue to have confidence in that when you’ve been historically doing 20%, 19% - 20% plus, so maybe any more color you can give us there?

No. I think once again, if you look quarter to quarter, we do not have consistency. I think if you look at last year, we had one quarter 18%, there was a couple in the 20s and one in 19, so yes, this is--you know, for a quarter, the 17 is probably 0.7, almost 18. It’s lower than past, but once again when you look at each year and each quarter and how your EACs and your improvements to the contracts fall, they’re going to be different every quarter and they’re not consistent how they fall in, so we are not concerned at all. We will still have margins in the high teens with room for improvement for the pension. I mean, it continues to go that way and will continue into the future.

Is pricing getting more challenging? Is it becoming more challenging to squeeze out EACs as maybe your customer and you guy are just working towards more efficient pricing?

It continues. I mean, obviously as we continue to improve these contracts and improve on the cost, it’s always difficult to find new ways to improve and earn money, so we have to have our Six Sigma--you know, our lean programs out there continuing to find, but it is harder every year. But we still feel at this point in time we can get what we need to out of these facilities in order to get the savings we need to get to these margins.

Is down blending and even the ramp-up in TRISO--is TRISO a little bit of a headwind now on margins, or how do we parse out the other activities in there versus the core Navy propulsion?

Right now, all we say in the NOG business is that roughly we receive a 15% fee, which is the 13% margin on that work, and then we--on the majority of that, if it’s fixed price incentive contracts, we go after the cost and try to do better for both the customer and us. We don’t talk individually about the other types of business in there, we just talk about it under that realm, so I’ll leave it at that.

Okay. I guess last one and I’ll jump back in the queue, absent the COVID $16.6 million, it seems like there wouldn’t have really been any scope for an EPS guidance increase. That seemed to drive the bulk of the upside. Do I have that correct? I know you called out some operations, but that was a pretty big chunk to the bottom line in the quarter and for the full year. Any other puts and takes outside that reimbursement?

No, if you look at it--and remember, as we talked about it, it was a reduction in cost, so it offset cost, so there was no revenue for that. It’s an offset of cost, so we feel that it’s business as usual. The margins underneath that, when you take it out, are still very good margins for that business.

Got it, okay. Cool, I’ll jump back in the queue. Thanks guys.

The next question comes from Matthew Akers of Barclays. Please go ahead.

Hey, good morning guys. Thanks for the question. I was wondering if you could possibly comment on the cadence of Columbia revenue from this point forward, now that you’re fully ramped on the first ship. Should we think of that as--you know, do we sort of wait until there’s another step-up when we get to the second ship, or does revenue continue to trend higher from this point? Any kind of commentary you share there?

Yes Matthew, we’ve sort of walked up the ramp on Columbia, so it’s steady state until the next order comes, and the next order comes, as we said in the script, in the next pricing agreement with our customer, which will cover ’21 and ’22, so there’s a Columbia in that pricing agreement and there’s four Virginias in there, so that’s how you can think of it. We ramp up early on long lead materials, we reach sort of a peak and then flatten until the next one comes, so that’s an approximate way to think about it.

Okay, thanks. Then can you comment a little bit more about nuclear power, some of the commercial businesses in the quarter? It looks like you saw a pretty good rebound and maybe some field service activity. Can you just comment on what you’re seeing there, and more specifically is there sort of a pent-up demand - I think Q2 was a little bit slower, and maybe kind of what you’re seeing into the fourth quarter at this point.

Yes, we originally forecasted five service outages in the first half and two in the second half, as you may know, and then because of COVID-related delays, that changed so that there were three in the first half and then four forecasted in the second half. We are going through--we’ve been going through those outages in Q3 and into Q4. One of those completed in Q3 and three of those go across the boundary from Q3 and into Q4, so we did see a pretty sizeable pick-up in our field services business in the second half of the year. We continue to maintain a pretty good tempo around component revenues and component deliveries with the steam generators that we’re delivering to the Bruce Unit No. 6, so altogether a good strong quarter for NPG.

Great, thanks guys.

Thank you.

The next question comes from Peter Arment of Baird. Please go ahead.

Good morning Rex, David. Rex, just a clarification, I guess, on your comments regarding a continuing resolution. If we do get more of an extended continuing resolution out into the spring, as some think might happen if we get a--who knows what’s going to happen tomorrow, but just give the changes that could--. Any sensitivity on how an extended CR would impact your thinking for ’21?

Well you know, Peter, that typically how those CRs work is you get funded through some fraction of last year’s appropriation, 95% or whatever that number is, and so I think if we were under a protracted CR, I think it would be mostly business as usual for us.

Okay, that’s helpful. Then just on the long lead offset in terms of that NOG growth you’re seeing from Columbia, is that going to continue to be a headwind and how do we think about just--a little bit kind of asking about the revenue profile there, just given the impact it had this year.

On the Columbia itself, you’re asking if the long lead material that we recognized so far is going to be a headwind to the future?

Yes, as we go into ’21, just because you did obviously see a significant bump from it earlier in the year.

Yes, so like Rex said, we have already ramped up on the Columbia, so it is in there, so that means if there’s long lead material involved, it’s in the process. So until we get to 2022 when the second Columbia comes in, it will be pretty much steady state for that program.

Okay, that’s helpful. Thanks very much, guys.

Thanks Peter.

The next question comes from Ron Epstein of Bank of America. Please go ahead.

Yes, good morning guys. Just a quick one. There’s been, I think, increased discussion around the possibility of a third Virginia class, but what’s your perspective on that, and have you seen any early movements by the Navy in terms of what you guys would be needed to do--would need to do to support that?

Yes Ron, we are having some discussions with our customer around that possibility. I would say a lot of that depends upon--obviously depends upon election dynamics and appropriators and things like that, so we aren’t allocating any capital to that yet. But in a favorable outcome there, it’s certainly a lot of new volume for our business.

Got it, and then maybe just a follow-on question along the same vein, Secretary Esper outlined this vision for a 550 ship Navy, and ultimately who knows if we actually get there; but if we move in that direction, what other opportunities do you think there are for BWX in that kind of environment?

The primary ones are the ones that we discussed earlier, which is an expansion of the fast attack fleet and then the follow-on vehicle, which we expect to be a larger vessel. The fast attack fleet goes from 66 to somewhere between 70 and 80 - I think that’s very favorable for us. Then I think the other variable here is around what those aircraft carrier configurations are. There’s been this discussion around the smaller carrier combine with the large carriers, what is the propulsion system for those smaller carriers. If it’s nuclear, that’s an interesting opportunity. I don’t know if that’s likely, but it’s an interesting opportunity for us. And then Columbia continues on its normal trajectory, so I think the primary opportunity is in the fast attack class with possibly some interesting upside in carriers.

Great, thank you very much.

Thank you.

We have a follow-up from Michael Ciarmoli of SunTrust. Please go ahead.

Thanks for taking the follow-up. Rex, how are you thinking about--with this year being the last heavy year for capex, how are you thinking about capital deployment going forward, and maybe even specifically the dividend and dividend payout ratio and thinking back to the last defense downturn and sequestration--you know, kind of the playbook that was used. Just maybe if you can level set us on capital deployment priorities.

Sure. As a reminder, next year is still a pretty heavy capital period for finishing up the expansions in NOG, and also to finish--to continue on the moly project, so still a heavy capex year in 2022. Having said that, these two capital deployment campaigns are wrapping up by the end of 2023--sorry, end of 2022, and so we should be entering a pretty heavy cash generating period for the company, depending on other opportunities. We’ll be thinking about what that implies for capital allocation, but I think we might be focusing on cash generation for the longer term. Having said that, we have plenty of balance sheet capacity and if an interesting opportunity comes through M&A or otherwise, we think we can take advantage of it. In terms of dividends, David, you want to address dividends?

The dividend, as usual, we feel that--you know, we look at it each year and we’ll take it up. We average the increase about the same as our peers on that case, so that will continue in the future.

Got it, thanks guys.

This concludes our question and answer session. I would like to turn the conference back over to Mark Kratz for any closing remarks.

Thanks again Drew, and that concludes BWXT’s third quarter 2020 conference call. If you have further questions, please call me at 980-365-4300. Thank you for joining us this morning.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.